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March 3, 2011
Many ADF personnel travel
the world through deploy-
ments and personal travel
and are probably very ex-
perienced at managing foreign curren-
cies. But trading foreign currencies,
or forex trading, is a very risky form
of investing. In one trade your invest-
ment can turn into thousands of dol-
lars in debt.
What is forex?
Foreign exchange trading is the
practice of buying and selling foreign
currencies to make a profit. Foreign
Exchange is also known as Forex or
An example of the simplest form
of foreign exchange is when you are
deployed overseas and sell Australian
dollars to buy foreign currency. When
you return home, if the value of the
Australian dollar has gone down rela-
tive to the currency of the country
you came from, then you will get
more money back for each dollar.
Foreign exchange markets work
in a similar way but on a larger scale.
Dangers of leverage
Most forex trading products are
This means you only have to pay a
fraction (for example, 0.5 per cent) of
the value of your trade up front, but
you are still responsible for the full
amount of the trade.
For example, a $50 invest-
ment could let you place a $10,000
forex trade. If the value of the trade
dropped by 0.5 per cent to $9950, you
could lose the original $50 that you
invested. If it fell further, you may
have to pay much more.
You could even be liable for the
entire $10,000 -- that's 200 times your
original investment -- unless you close
out the trade before the losses become
Risks of forex trading
To trade successfully in forex you
need to understand the economic con-
ditions of each country whose cur-
rency you are trading, and how those
conditions affect the relative value of
This is extremely difficult because
so many factors come into play
including politics, economics and
There are many providers and
types of forex trading products.
Some that you may see adver-
tised are forex contracts for differ-
ence (CFDs), margin forex trad-
ing, spot forex contracts and forex
Different types of forex trad-
ing products involve different risks.
If you are looking at forex
CFDs, download ASIC's
investor guide Thinking of
trading contracts for differ-
ence (CFDs)? from www.
There are also many soft-
ware programs available.
Be wary, though, of mar-
keting promises that suggest
that by using a particular
product you will get access to
better exchange rates.
Trading in international
currencies is never easy and
requires a huge amount of
research and monitoring. Even
the most skilled and experi-
enced investors cannot reason-
ably predict currency move-
So always consider our six
steps to investing between the
flags: Understand yourself,
understand investments, devel-
op an investment plan, decide how
to invest, implement your plan and
monitor your investments.
For more information, see ASIC at www.
fido.gov.au or call 1300 300 630. Email
ASIC with topics that interest you at
Forex market risks:
You could lose more money than you put
in when the trade is leveraged.
There is a huge volume of trading.
You're dealing with foreign traders and
Markets are open 24 hours a day, five
days a week, so it's hard to monitor.
Markets are impossible to predict
because so many factors affect exchange
To trade successfully:
Have extensive trading experience in
shares and other investments for a long
Know how forex works in detail.
Read the product disclosure statement
and discuss it with your financial adviser.
Have the financial capability to afford to
lose more than the amount you invested.
Beware foreign threat
Forex trading can look
attractive, but it's extremely
risky, according to ASIC
chairman Tony D'Aloisio.
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